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A question to the knowledgeable / investment savvy folks here. Having historically had a heavily equity biased portfolio, I want to start allocating new money aggressively towards debt products to sort of start balancing out / rebalancing my portfolio over the coming few years. But with the current tax regime I am struggling to think of avenues which can at least be in the ball park of inflation indexed returns post tax (i.e. say 5.5-6%). These are not with a short term view but can be longer term holdings.

The only two instruments I am gravitating towards is arbitrage funds and balanced funds (acknowledging of course that thats still a debt / equity mix and has fee structures that are closer to 100% equity funds without the corresponding returns).

Are there any debt instruments that can provide decent post tax returns? As per my understanding they’re all subject to full income tax hit so I’m finding debt funds, FDs and even GILT funds and the like all pretty unattractive on a post tax returns basis.

Some clarifications if relevant:
I don’t want to pursue high risk deposits with co-op banks or riskier corporate bonds, just to be clear and I’ve already invested in PPF over several years now and will continue to do so as long as I’m earning (1.5L p.a. each for me and my wife). I’m not a salaried employee but a consultant so there is no employer contribution of any sort in my life in the nature of PF or similar.

Thank you.

Suggest you look at debt funds on the whole and do a search for 5 and 10 year returns (annualized). There are several safe examples of approx 8-9% pre-tax returns. You'd end up in the 6s post-tax. Remember, returns are not always consistent. I use moneycontrol but there are other avenues to search.

I strongly believe that with a bit of search it is possible to get to 6-7% post tax return in the AA category corporate bonds, if you can read the prospectus of the issue and the balance sheet of the company. Lower than that I would not recommend. It's a decent combination of risk and reward.

Don't bother too much about returns. That's because higher the returns in a debt investment, higher will be the risk. But you are already taking on risk with your outsized equity exposure. So it doesn't make sense to take on risk with your fixed income portfolio, for that extra 0.5% to 1% pa returns.

So for somebody starting off with debt MFs, liquid funds is the best choice - it is as simple as it gets. NAV will go up every single day. You will get returns equivalent to 1 year FD from SBI typically. And historically, it has offered 7% pa returns. Choose 'big name' mutual funds like ICICI/SBI/HDFC etc.
https://www.valueresearchonline.com/...25/debt-liquid.

Don't bother much about taxation either. Avoid paying taxes by simply NOT selling the liquid funds, till your retirement. And after retirement, you can start redeeming your liquid fund holdings. Only the interest earned will be taxed, but then you will be in zero tax bracket.

Arbitrage funds are OK, but only because since it is treated as equity fund from tax perspective. You can use this for future known expenditure (car/higher education/home loan downpayment/wedding etc). You will get liquid fund-like returns.

Don't bother investing in balanced funds. When you have an equity MF portfolio and a debt MF portfolio, you are doing a "balanced" strategy yourself.

So:

- Equity funds for high returns (but with risk)
- Liquid/Gilt funds for inflation matching returns (with zero risk)
- Arbitrage funds for future large expenses
- Gold funds if you fear an asteroid strike wiping out half the planet.

With respect to liquid funds, does investing in a fund with large AUM safe / makes more sense compared to say another fund with half the AUM size but slightly higher returns. I understand the meager difference in the liquid fund returns are not worth it but am more curious about the size of AUM acting as a better safety net in case of liquid funds - Say for example investing in Axis Liquid Fund whose AUM is almost half of HDFC Liquid fund but having a very tiny edge on returns.

AUM of the liquid fund doesn't matter much, but I would be cautious of liquid funds from very small AMCs. If you are using liquid funds as a source for STPs into equity funds, as I do, AUM or returns should not matter. Don't clutter up your portfolio for a tiny percentage bump up.